RUSSIAN LAW JOURNAL Volume XI (2023) Issue 1s

NARROW YET BROAD; CLEAR YET BLUR: THE LAW OF CONTRACT OF

INDEMNITY IN INDIA

ANKITA KALITA1, DAMODAR HAKE2, RAJ VARMA3*, ASHUTOSH PANCHBHAI4 AND ABHIJIT
VASMATKAR5
1Student, Symbiosis Law School (SLS)
2Assistant Professor, Symbiosis Law School (SLS)
3Assistant Professor, Symbiosis Law School (SLS)

4Assistant Professor, Symbiosis Law School (SLS)

5Assistant Professor, Symbiosis Law School (SLS)

Symbiosis International (Deemed University) (SIU),

Vimannagar, Pune, Maharashtra, India
*Email: raj.varma@symlaw.ac.in

Abstract
The Contract of Indemnity is a wide used clause used frequently within the mercantile fraternity.
However, the same has been down written in the Indian Contract Act under two sections, namely, 124
and 125. There is yet an ongoing dilemma whether the two clauses cover implied indemnity within its
ambit and on when does the indemnity contract comes into play in favor of the promisee. Moreover,
there is ambiguity on whether the term indemnity is synonymous to the terms such as damages,
compensation, reimbursement and restitution. The following article distinctly attempts to resolve
these obscurities. Furthermore, there are frequent mercantile disputes where the crystal yet coinciding
line between indemnity, insurance and subrogation are blurred out. Therefore, the author comes up
with a concentric circle mode of solution to resolve the entire vagueness of the Indian Contract of
Indemnity, 1872. In addition to this, the author has also pointed out that despite the two sections being
looked down upon as being a narrow scope of indemnity to be compatible with the transnational
disputes; if the contemporary precedents being taken into account and the parent contract of indemnity
is examined cautiously, the two plain sections are a massive ground to rely upon while resolving
contemporary transnational as well as domestic trade disputes on indemnification. Lastly, the author
recommends a few suggestions that can be taken into account while resolving the civil law disputes of
indemnification in the contemporary era unless a massive amendment is undergone by Sections 124 and
125 of the Act, 1872.

Keywords: indemnity cum insurance; indemnity cum subrogation; concentric circle mode;
conclusiveness; equity; narrow yet enlarged; crystal clear yet blur.

Table of Contents

Introduction
1. RIGHT TO INDEMNITY OR RIGHT TO DAMAGES
2. STATEMENT OF ENQUIRY (WHAT IS THE CONCLUSIVENESS OF THE CONTRACT OF INDEMNITY)
3. WHETHER THE COURT OF EQUITY HAS THE JURISDICTION OF CIVIL SUITS
4. NARROW YET ENLARGED CONTRACT OF INDEMNITY IN INDIA
5. SUBROGATION AND INDEMNITY IN INDIA
6. Conclusion:

Introduction
The Indian Contract Act, 1872 (hereinafter the Act) provides a number of sections that specify the nature
of an indemnity contract and the promisee's rights thereunder.[1] A contract has a bilateral nature.[2]
Section 124 of the Act of 1872 is in some ways incomplete because the definition only takes into
consideration the duties and obligations of one party.[3] Only acts against the party who has been
indemnified are covered by this section when read in conjunction with Section 125 of the Act of 1872.
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As a result, it appears that the main issue was with promises made to the promisee to protect them from
third-party claims or liabilities.[4] Since the definition of "indemnity" is flexible, it can be applied more
broadly to any agreement that forbids a party from suffering loss. The duties of indemnification arise in
a number of additional contexts outside of contracts, whether through operation of statute or common
law (including equity). Following is a succinct summary of the significance of the obligation and right to
indemnity:
A right to indemnification is not restricted to contractual situations but may exist in any an express or
inferred manner. However, there are instances where the law imposes an obligation on one party to
indemnify the other as a result of that party's implied promise to act as would be appropriate in the
given circumstances.[5]
The legal precedent for the so-called 'English rule' of contract interpretation is based on the instances
of Darell v. Tibbits and Castellain which are respectively the founding cases for the same.[6] It is
unknown and questionable where the English Law of Indemnity originated. In the English case Adamson
v. Jarvis, when the plaintiff sold certain livestock at the defendant's request and the circumstances
further developed to reveal that the cattle in question did not initially belong to the defendant, the
principle of indemnity was first recognised with its implications. Due to the fact that the plaintiff
followed the defendant's instructions given to him in accordance with the indemnification contract, the
defendant was sued by the plaintiff for the loss.
Sections 124 and 125 of the Act of 1872 deals with indemnification arrangements when the promisee is
guaranteed complete protection from loss. Care must inevitably be taken to avoid the idea of indemnity
being viewed as undue enrichment of the promisee and the third party. Real indemnity contracts were
therefore used to support the idea of indemnity.[7]
The research study that follows, however, stops to investigate two specific sections of the Indian
Contract Act, 1872, namely Sections 124 and 125, rather than looking into the various alternative
indemnity provisions that are currently in effect around the world.
The scope of Adamson v. Jarvis, however, does not fit under section 124 of the Indian Contract Act's two
indemnity sections, which is silent for the indemnity-holder from suing for losses they themselves
created.
Therefore, it is extremely astounding to see that only sections 124 and 125 of the Act of 1872 apply to
the "contract of indemnity," which is a crucial and regularly used legal document in the mercantile
community.
The Act of 1872, which only includes two parts, doesn't clearly address a few yet major significant issues.
In addition, judicial interpretation and the expansion of the law of indemnity give us the impression that
these two sections' legislative text has not altered significantly.
As a result, the study report includes a gap analysis of Sections 124 and 125 of the Act of 1872 as well as
a brief assessment of the ambiguous areas and areas in the draught that need quick improvement. The
study thus proceeds in a chronological fashion, highlighting first the gaps in the Sections as indicating
solely the express vows. Secondly, there is a fine line between an obligation to indemnify someone by
returning money to him after he has paid it, in which case no equitable relief is required, and an
obligation to relieve a person by preventing them from having to pay their debt, in which case equity
will provide relief in the form of quia timet relief. There is a distinction between damages and
indemnification that can be made in the indemnity clause of any statute (in the following research paper
its the Act of 1872), when it specifies the conclusiveness of the Contract of Indemnity which is discussed
below. Such differentiation denotes two types of dilemmas against the obligation to indemnify. The
aforementioned analysis leads to the examination that sections 124 and 125 of the Act, 1872 are narrow
in description but enlarged in interpretative use in determining decree on obligation of indemnity, which
is explained later. This is indicated by the use of these sections in civil suits and their decision-making
with a larger interpretation.
The indemnity clauses found in sections 124 and 125 of the Act of 1872 are not all-inclusive, and the
preamble of the Act of 1872 welcomes amendments with every step of mercantile development in the
modern era, whence, the paper includes recommendations for resolving grey areas.[8]
‘WHEREAS it is expedient to define and amend certain parts of the law relating to contracts.’

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The idea of subrogation and the duty of indemnification were briefly discussed in the paper's final part
because it only applies to contracts requiring indemnity.[9] It is important to take into account the fact
that the subrogation concept has not received much criticism from legal writers. This is due to two
factors. First, the majority of works on indemnity law have been written with practitioners in mind, and
practitioners are not generally engaged in policy discussions. And secondly, the subrogation doctrine
dates back at least 200 years.[10] Such a notion is an essential component of the requirement of
indemnity given its longevity of more than a century. Nothing could be more advantageous than for an
indemnifier to retain the recovery in trust for the benefit of the "innocent indemnifier" and penalise the
perpetrator.[11]
There is only one type of subrogation that is covered by the indemnity contract, and although, though
insurance and indemnity are two different contracts, they are sometimes categorized as the same by
default. The doctrine of subrogation only applies to contracts of indemnity. As a result, as detailed in
the following subsections, the author clarifies the doctrine of subrogation, as well as how it applies to
and contrasts with the contract of indemnification and insurance.

The Dilemma on Express or Implied Contract of Indemnity

If there is a state of circumstances to which the law attaches a legal or equitable duty to indemnify, or
by statute, the obligation to indemnify may emerge from an express or implied contract of
indemnification, or from an obligation flowing from the parties' relationship.[12]
When a person with a statutory or common law ministerial duty is called upon to exercise that duty on
the request, direction, or demand of another, and acts in a manner that appears legal but is in fact
illegal and a breach of the duty, and thus incurs liability to third parties, there is implied by law a
contract by the person making the request to keep indemnified the person having the duty against third
parties. It makes no difference whether the individual making the request is unaware of the inadequacy
of his title.[13] In every sector of day-to-day mercantile and common actions, there is an obligation to
indemnify. It starts with vicarious culpability in a master-servant relationship and progresses to a duty
of care between parties who are in close proximity to one another. Indemnification is also an implied
agreement between the principal and the agent, as well as between the partners in a partnership.
Factors such as the acceptable risk allocation between the acting and asking parties, the terms of any
other contract between them, the nature of the loss claimed, and any separate negligence on the acting
party's part in complying with the request appear to be important.[14] It provides the employee's written
account of how he went about doing his work.
In general, practicing lawyers think that the courts are more concerned with the parties' explicit intent
than with concepts of justice and equity.[15] However, to avoid overreaching, express indemnity terms
shall be rigidly construed as narrowly as possible.[16]
Only in the event of dishonesty, lack of good faith, or failure to comply with the request of the person
who discharged the responsibility, did the person undertaking the act on someone else's request negate
the application of the indemnity by the primary doer to the secondary doer.[17]
In terms, the current sections 124 and 125 of the Indian Contract Act, 1872 apply solely to express
pledges; nevertheless, it should be emphasised that an obligation to indemnify may be affixed to
numerous types of contracts by operation of law.[18] The idea of indemnification also applies when a
person having a statutory or common law responsibility is asked to perform that duty at the request,
instruction, or demand of another, or when the person seeking indemnity is acting in his or her own free
will.[19]
Since the Indian Contract Act, 1872 is both an amending and a consolidating Act, it does not cover all
aspects of contract law that Indian courts must consider. Sections 124 and 125 of the Act, 1872 do not
contain the entire law on the subject of indemnification contracts.[20]
The contract of indemnity is exceedingly unclear and an open invitation to endless delegation based on
its ill-defined provisions under Sections 124 and 125 of the Act, 1872. As a result, the Indian Law
Commission has really urged that the definition of contract of indemnity and its instrumentalities be
broadened by defining each class of contract of indemnity disputes as quasi-contractual, and that a part
of the required effects be included.[21]

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1. Right to Indemnity or Right to Damages

There is a clear distinction between promising to pay a creditor if the principal debtor defaults on a
payment and promising to keep a person who has committed or is going to enter into a contract of
responsibility indemnified against that liability regardless of whether or not a third party defaults.[22]
The indemnity contract is fully dependent on the recital and the agreement's operative part.[23] The
promisor is liable for both future and past transactions if the recital of the indemnity bond contained
the phrase "may be, may from time to time, may in any way suffer," but the operative part of the bond
contained the phrase "and shall also, all the time indemnify for all losses, injury, and damages
suffered."[24]
The author again poses a rhetorical question to the reader, asking whether a contract of indemnity is a
payment for a breach of contract in the form of damages or compensation, specific performance of the
contract, or actual performance of the contract at the agreed-upon time for the purpose of discharging
the obligation against actual losses suffered by the promisee.
The right to indemnification is granted by the initial contract, whereas the right to damages comes as a
result of that contract's breach. These two rights are sometimes confused, and one reason for this is
because when a contract is breached, indemnification is frequently found to correspond with the number
of damages. In these instances, whether the right is referred to as a right to indemnification or a right
to damages, the effect is essentially the same, and it is sometimes overlooked that these two rights
embody two fundamentally different legal concepts.[25]
Any money paid under an indemnity contract is the promisor's execution of a legal obligation against the
promisee's obligation under the parent contract; however, when there is a breach of contract, the case
is dealt with under section 73 of the Indian Contract Act, 1872.[26]
When the promisee suffers the actual loss, the legal obligation is fulfilled within the scope of the
indemnification contract [27] or where there is a risk of loss as a result of the agreement's construction,
whether there is an absolute obligation or an independent requirement.[28]
However, if the promisor refuses to indemnify the promisee at the moment of indemnification, or fails
to perform the obligation, or renders himself incapable of doing so, there is a violation of the indemnity
contract, and the promisee can seek damages or compensation.[29]
Therefore, a breach of contract may occur as a result of
a) A breach can occur when one party fails to complete his responsibility by the contract's deadline;
b) A breach can also occur when a party clearly announces that he will not perform his promise;
c) A breach can also occur when a party does something that prevents him from performing his
obligation.
The term "compensation" refers to a monetary award or other kind of remuneration granted to a person
who has suffered a loss as a result of the other party's violation of contract.[30] The term "damages"
refers to an estimate of a loss or injury that has occurred. Damages are monetary compensation for the
harm that a party suffers as a result of the other contracting party's failure to perform.[31]
Despite the fact that the outcome of compensation, damages, and indemnity may be all the same, the
right of indemnity is provided by the original contract, which provides for the promisor to reimburse the
promisee for the precise amount of the real loss experienced [32] A right to damages (pecuniary
compensation) or compensation arises from a breach of contract and is either the estimated or actual
worth of the loss sustained. At times, the damages or compensation may be significantly more than the
actual losses sustained by the promisor.[33]
The court's discretion and the affecting party's will (liquidated damages within the parent contract)
determine whether damages or compensation will be granted to the affecting party before or after the
contract's actual termination date.[34] However, whether you have a claim to indemnity insurance after
or before you experience a loss is determined by how the contract between the two parties is
drafted.[35]
It's also worth remembering that when a contract is broken, neither the party that broke it eo instanti,
i.e., at the time of the breach, incurs any financial obligation, nor the party complaining about the
breach becomes entitled to a debt owing from the other party. As a result, no financial duty exists until
the court determines that the party alleging a breach is entitled to damages.[36]

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A contract of indemnification, on the other hand, is an existing arrangement between the contracting
parties in which the promisor promises to compensate the promisee in the event of the promisee's real
loss. As a result, there is no question as to whether indemnity performance is specific performance for
a contract breach or obligated performance of the original contract's obligated indemnity. However,
when the promisor's responsibility is fulfilled, it is fully dependent on the form of the indemnification
contract.[37]
The contractual parties will find it quite simple to determine the amount of indemnification in terms of
express contract. However, in the instance of an implied contract of indemnity, the court must consider
the promisor's unjust enrichment, unfairness, and hardships before granting the promisee's
indemnification decision.[38] As an equitable relief, the court’s next order must include specific
performance of the implied contract of indemnity.[39] As a result, specific performance under an
implicit contract of indemnity is at the discretion of the courts, whereas the right to indemnification
under an express contract stems from the already obligatory conditions of the principal contract.[40]

2. Statement of Enquiry (What is the conclusiveness of the Contract of Indemnity)

When a person undertakes to indemnify another, it is held in Calcutta, Madras, Patna, and Allahabad
High Courts that the latter may compel the indemnifier to put him in a position to meet the liability that
may be placed upon him, without having to wait until he has actually discharged it. The Bombay is now
of the same mind.[41] There is however a prima facie requirement of proof to prove the specific amount
of loss that the promisee will suffer in order to compel the indemnifier to endure the incoming losses
that would be sustained by the promisee. To establish that the promisee will suffer any loss, any
collateral event must occur in order for the promisee to incur the impending certain loss.
A contract of indemnity, on the other hand, is a separate contract in which the right to demand
indemnification arises only if a contingency in the main contract between the promisor and the promisee
occurs.[42] In an indemnity, the risk of any loss occurring is only contingent in the case of the
indemnifier.[43] Therefore, the happening of the contingency is of utmost importance.
A contingent contract, according to Section 31 of the Indian Contract Act of 1872, is a contract to do or
not do anything if some event, collateral to the contract, occurs or does not occur.[44] Similarly, section
124 of the Indian Contract Act, 1872, stipulates that any collateral event required for the section's
application is loss inflicted to the promisee by the promisor or any other person.[45]
The indemnifier does not become liable until the indemnified has experienced the actual loss, i.e., until
the contingency takes its actual turn, according to the Punjab and Nagpur decisions.[46] As a result, a
pledge to be principally and independently accountable for the actions of another person could be
construed as a contract of indemnity.[47]
In general, it is imputed that insurance arrangements are similar to indemnity contracts. It is, of course,
a question of construction whether an insurance policy is merely loss insurance or a contingency policy.
When an insurance is simply a contingency policy, the insurer is required to pay if a defined contingency
occurs, and the payment represents either a mere loss or the prospect of loss that the event involves.[48]
A cause of action develops under an indemnity contract when the damage that the indemnity is meant
to cover occurs, therefore a suit filed before the real loss has occurred must be dismissed as
premature.[49] The distinction between an insurance (except life insurance) and an indemnity contract
is hazy, but it is crystal evident based on the facts and form of the parent contract between the promisor
and the promisee.[50]
The author hereby again wants to draw the reader's attention by rhetorically questioning whether courts
of equity have any role to play once the promisor and promisee have drafted a contract.
It was quickly apparent that indemnification could be worthless if the indemnified could not pursue his
indemnity until the loss had been reimbursed. The court of equity stepped in at this point.[51]
When the parties have already made a contract establishing their liability boundaries, equity has no
capacity to reshape it into a new contract that is more favourable to the indemnitee. Equity would not
be permitted to offer relief in advance of the contingency or event on which the contract is to be
performed on any basis.[52] The indemnitor's obligation is created by a special agreement between the
parties, and that agreement alone must decide the extent of the defendant's liability, both at law and

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in equity; for there is no concept on which a court of equity or law can expand the legal impact of the
agreement.[53]

3. Whether the Court of Equity has the jurisdiction of Civil Suits

A court of equity, also known as an equity court or a chancery court, is a court that has the authority to
apply equity principles to matters (both civil and criminal).
The subject of contract law is listed as item 7 of the concurrent list (list III) in the seventh schedule to
the Indian Constitution.[54]
Contract law is a branch of law that falls under the ambit of Article 13 (3) of the Indian Constitution.
When contract disputes are brought before courts of equity where there is an obvious conflict with the
law, the essential structure of India's constitution is violated, and the judicial review power must be
invoked.[55] Any contract issue between the parties must be resolved through civil court litigation.[56]
Because the commitment to indemnify under section 124 of the Act of 1872 is conditional on loss, the
liability will not emerge until the condition, express or implied, is met.
In the resolution of legal problems, the precise language of the terms of reimbursement for loss sustained
by the promisee is critical.[57]
As a result, it is now evident that the heart of any indemnification clause is that the indemnified must
suffer an actual loss, as defined by section 124 of the Indian Contract Act, 1872. When the promisee
suffers an actual loss as a result of the promisor's independent liability under the indemnity contract,
the indemnifier becomes liable. Contract law is a type of civil dispute in which the court of equity has
no role to play because it is outside the scope of the law.[58]
After removing the uncertainty between general insurance (except life insurance) and indemnity
contracts, it is a question of construction as to whether the contract's obligation is an absolute obligation
to incur liability prior to the actual loss or one of indemnity.[59] When a promisor incurs an absolute
obligation against the promisee's liabilities, he can sue for its enforcement even if the promisee has not
suffered any actual harm.[60]
It's also worth noting that, according to the insurance policy, establishing potential damages may be
more difficult than proving out-of-pocket losses and expenses for indemnification. It would allow the
promisee to receive the maximum compensation for the smallest loss.[61]

4. Narrow yet Enlarged Contract of Indemnity in India

The earliest legislative idea of loss compensation, or indemnity, derives from England's unique legal
system. Its origins can be traced back to equity law. There used to be a popular statement that
compensation without liability was not authorised at all.[62]
A contract of indemnity, according to section 124 of the Indian Contract Act, 1872, is one in which the
promisor agrees to rescue the other (promisee) from loss caused by the promisor's behaviour or the
action of a third party.[63] In the broadest sense, it refers to remuneration for any loss or liability
sustained by a person, whether as a result of an agreement or otherwise.
The various forms of the indemnity provision arise from the working out of the contracting parties'
freedom.[64] Despite the fact that section 124 of the Act, 1872 refers to the promisee's indemnification
for losses caused solely by human agency, presently extended mercantile practises include indemnity
for any sort of loss, as well as financial restitution and indemnification against loss caused by the
promisee's own conduct.[65] There are further grounds for the mentioned if one considers the implied
indemnification agreement. By obfuscating the distinction between a contract of indemnification and a
general insurance provision (except life insurance), one can consider including damages sustained by
activities not directly caused by human conduct.[66]
Furthermore, the indemnification idea is employed in international contracts, which generally follow
common law and include any damages incurred by the indemnified party.
It is important to realize that tort and indemnity insurance are inextricably linked. Insurance is an
alternative to tort for obtaining compensation for harm to a plaintiff, and it is a technique for a
defendant to avoid the harm of having to pay for his torts to a defendant. It is common knowledge that
an insurance contract, particularly fire insurance, is an indemnity contract, and that when a loss

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happens, the assured must establish the real amount of his loss. The amounts indicated in the policy
only show the defendant company's liability limit on the outside.
Indemnity, as applicable to marine insurance, must not be an indemnity, as contemplated by the Indian
Contract Act, as the loss in such a contract is covered by the contract itself and such loss is not caused
to the assured by the conduct of the insurer nor by any other person. However, there is an implied
indemnification clause in maritime insurance that states that, if the loss is proven, the insurer will
reimburse the loss sufferer. As a result, one can conclude that, while section 124 and 125 of the Act,
1872 are ambiguous, they are generic and must be read in conjunction with the insurance clauses,
because under the contract of indemnity, loss (the collateral event for indemnification and the
contingency) must be suffered by the promisee, whereas under the insurance clause, loss must be
suffered or absolute to be suffered by the promisee upon proof of an upcoming loss (the collateral event
to loss). When the indicated collateral is proven, it is the actual and definite loss that the promisee will
suffer, where the indemnifier will incur all the expenses itself as a matter of and so, indemnification
and insurance converge at this point, increasing the extent of indemnification under the narrower
illustration of section 124 and 125 of the Act of 1872.
One can take the day-to-day example of car insurance. When a car meets with an accident, it is absolute
that an upcoming monetary loss will be suffered by the insured and hence the insurance company saves
the insured from the upcoming absolute loss by itself incurring all the expenses without involving the
promisee to pay for the damages. This is indemnification. However, at this point it will depend upon
whether the amount discharged by the insurance policy is exactly equivalent to the loss suffered or the
entitled amount.

Analysis of the provision of indemnity clause between the Indian Contract Act, 1872 and
International counterparts (USA & Europe)
Why a particular provision needs to be compared with the International Counterparts?
An international comparison fosters a broader public interest in discouraging illegal activity and
maintaining the fairness of the judicial system,[67] as well as the parties' consideration of justice.[68]
It is therefore crucial that every single provision of any statutes be clearly described and free of any
ambiguities. An illustration will help you to understand this.
If the illegal transaction is unenforceable and there is a strong enough link between the claim and the
illegality, a contractual claim may be tarnished by it.[69] Like thus, in an indemnity contract, if the
indemnity-holder asks indemnification in line with the parties' agreement owing to any illegal action the
indemnity-holder has engaged in and these sufferings are being covered by the innocent indemnifier.
The indemnity clause under the Act of 1872 is only covered up in two paragraphs, despite the provision
being of the utmost importance and usage, therefore there is a chance that the indemnifier would be
held accountable for losses incurred by the indemnity-holder as a result of illegal or unjust conduct.

Comparative analysis between USA, Europe and India

Particulars United States of Europe India
America
Gross Negligence Depends upon the Based on the type of Not mentioned
contract’s express indemnity, whether, specifically
reference and public indemnity insurance or
interest indemnity of fixed sums
Unequivocal Standard The indemnification The operation of the There is
cannot be implemented indemnity clause is indemnification for loss
by the indemnifier based on 8-principles caused by the
against the indemnified indemnifier himself or
if in case of joint- by any other person
liability

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Joint Liability of the The indemnification There must be inclusion There is

Indemnified & cannot be implemented of such ‘promissory indemnification for loss
Indemnifier by the indemnifier warranty’ caused by the
against the indemnified indemnifier himself or
if in case of joint- by any other person
liability
Provision of strict- Varies from state-to- There is a principle of Based upon the matter
liability and pre- state duty of disclosure of to which the promise of
existing condition material facts indemnity applies
Specific time of The loss has to be Admissibility of the Based on whether the
implementation of incurred as per the indemnity clause is to construction of the
indemnity clause definition of the clause reimburse the losses of contract of indemnity
of contractual the indemnity-holder
indemnity

Analysis
Inclusion of gross negligence: Regarding the indemnification clause in the United States, it mostly
depends on how the indemnity contract is drafted. It is possible to cite a significant piece of case law.
In Marquette Transp. Co. Gulf-Inland LLC v. Unknown Potential Claimants, the court determined
that the indemnity obligation must cover gross negligence if the contract of indemnity makes express
mention of negligence and there are numerous assertions that the contract of indemnity applies to
damages regardless of how damage was caused.[70]
The practicality of splitting indemnity contracts into ‘insurance indemnity’ and ‘indemnity of fixed sums’
is highlighted by the European countries.[71] This clause implies that the contract of indemnity
encompasses egregious negligence. The insurance indemnity ensures that the indemnifier is required to
reimburse the indemnified for the real harm brought on by the occurrence specified in the indemnity
contract. This strongly suggests that the actual amount of the damage is paid to the indemnified under
the terms of the indemnity contract if the indemnified event includes losses brought on by gross
negligence.
Unequivocal Standard: According to US state law, the intention to indemnify must be stated in
‘unequivocal terms.’ This can be supported by US state court precedent. The court decided in Charles
v. Gervais that the contractual indemnification clause had to clearly refer to the indemnitee's
‘negligence’ in order to meet the ‘unequivocal standard’ under ‘Louisiana law.’
In light of this, it is important to note that a contract of indemnity must specifically state the
circumstances under which the indemnified will be compensated by the indemnifier.[72]
The ideas of the indemnity contract are highlighted by Russian experts, who are from a European nation.
These particular principles close the loophole in the indemnification contract that prevents good faith,
equivalence, and the protection of the vulnerable party from being accommodated,[73] Significantly,
these principles serve as the cornerstone of an indemnity contract and are comparable to the idea of
stated terms that should be included in such a contract. Reference can be made from the brief
elaboration of each of the principles, such as, Principles[74] of utmost good [indicating fair exchange
of information between the indemnifier and the indemnified]; interest of the indemnified [the
indemnified must be prevented from turning the indemnity contact based on a contingency into a
gambling and hence must ensure their best that the cause of action leading to the occurrence of the
events under the indemnity contract would not occur]; restoration to the previous status of the
indemnified [indicating that the indemnified is not doubly benefitted than the actual damage suffered
by him]; lad causa proxima [the indemnification should be precisely and specifically for the event/issue
mentioned in the contract of indemnity]; action directa [indicates that the indemnified has the absolute
right to claim indemnification directly from the indemnifier] solidarity-based compensation [indicating
that when the indemnified is concluding indemnification from several contract of indemnity, the amount
of indemnification should not exceed the actual damage suffered by the indemnified]; efforts for
reduction of damage [the indemnified must ensure utmost care for the non-occurrence of the
indemnified event in the same manner as the indemnified would have taken in the absence of the
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particular contract of indemnity]; and lastly, right of subrogation [the indemnifier has the right to get
into the shoes of the indemnified after indemnification of the damages caused to the indemnified for
acquiring the damages from the person who caused the damage]. This eliminates the need to deal with
‘unequivocal standards’ in indemnity lawsuits by making the aforementioned principles official
provisions of the indemnification contract in European states.
Joint Liability of the indemnified and the indemnifier: Despite the indemnifier and the indemnified
sharing shared liability, it is a well-established principle in the states of the USA that the indemnifier
cannot seek compensation for damages incurred by the indemnified. In the case of Texas Dept. of
Transportation v. Metro. Transit Auth. of Harris County, the court held that the "express negligence
doctrine" in the contract of indemnity did not apply when the indemnified had been found to be at fault
and was attempting to recover indemnification for joint enterprise liability imposed upon it as a result
of the indemnifier's negligence.[75]
Conversely, in the European country, similar to the UK's practise of indemnification, there have been a
popular warranty provision known as the promissory warranty, by which the indemnified guarantees the
indemnifier of the existence of certain circumstances at the moment of risk transfer for the future, i.e.,
during the entire period of the indemnification.[76] Therefore, it can be inferred that the indemnified
is required to provide a promissory warranty stating that the possibility of joint culpability damages
exists in the event that indemnity is withheld by the indemnified for joint-liability scenarios from the
indemnifier. Even in the absence of a causal connection between the warranty breach and the risk
materializing, the consequence of breaching the promissory warranty would otherwise have the
catastrophic consequences of cancellation of the indemnity contract and release of the indemnified from
payment of the indemnity.
Provision of strict liability and pre-existing condition: The scope of the indemnification contract differs
from state to state in the USA. However, situations from the United States can be cited where the court
instructed the party negotiating an indemnification agreement to expressly list every type of damage
that the indemnity contract would be covering. Referring to the case law of Atlantic Richfield Co. v.
Petroleum Pers., Inc., a Texas appellate court denied indemnity because there was no specific mention
of the kind of negligence that was covered, even though the indemnity provision covered all claims under
the phrase "including but not limited to any negligent act or omission" on the part of the indemnitee.
Even if the ruling was overturned on appeal, ambiguity should be avoided whenever possible.[77]
The duty of disclosure, which derives from the doctrine of absolute good faith (also known as uberrima
fides) and is related to the risky nature of the object of indemnity, is a principle that is explicitly stated
in European countries like the UK. It states that the indemnity-holder must provide the indemnifier with
accurate information about the objects of the indemnity and the risk factors.[78]
The method of the indemnified's initiative to risk disclosure is still permitted by European law, but
modern indemnity contracts and business practise prefer the questionnaire method, in which the
indemnified is provided with a questionnaire by the indemnifier and is required to provide truthful
responses to the questions.[79] This in turn ensures the wide coverage of the events of the contract of
indemnity.
Specific time for implementation of the indemnity clause: Unlike the Indian Contract Act, 1872, section
124 does not address the question of whether the indemnity clause is applied to "save" the promisee
before the loss is incurred or to hold the promisee harmless after the loss is incurred. Instead, it proceeds
with the clause of indemnification to "save" the promisee against loss caused to the promisee. The phrase
"save" suggests the promisee's rescue before to falling into the harm pit, but "indemnity" implies payment
to the indemnity-holder. As a result, there are certain problems with the indemnification contract in
India.
However, in USA, the definition of the indemnity clause proceeds with the usage of the phrase,
‘indemnity as a provision in which one party agrees to ‘answer’ for harm……...’[80]. Therefore, the
contractual indemnity in USA is clear with the time of conclusion of the contracts of indemnity, hereby,
the indemnity-holder incurs the loss (say a situation or a problem) and the indemnifier is liable for the
task of solution to the problem (say the answer to the suffered harm).
The insurance indemnity (actual amount of indemnification payment), which must be provided primarily
in cash and the contract of indemnity is to ‘reimburse’ the losses for the goal of indemnification, is a
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type of limitation against the indemnifier in European countries.[81] This sort of limitation of the type
of insurance indemnity is possible only when the indemnified suffers the loss and the actual and exact
amount of damages incurred by the indemnified can then be summarized. Therefore, this type of
indemnity insurance significantly implies the time of indemnification, or the time of conclusion of the
contract of indemnity is as and when the indemnified encounters the indemnified event and suffers the
loss.
It is high time for India to expand the scope of indemnification from just two sections to a specific
statute after the comparison of some key details under the contract of indemnity mentioned above. In
the age of globalisation, indemnity is crucial in the conduct of business and the services of professionals.
Therefore, maintaining a ‘professional indemnity policy’ is essential for upcoming business entities (to
avoid scenarios in which a business entity might incur losses due to the negligence of a professional
engaged in the business) and for the professionals involved in the business entities to ‘purchase a
professional indemnity’ to shield themselves from their own professional liability.[82]
Analysis on Contrast and Coincidence between Insurance and Indemnity in India
Insofar as the obligation of the insurers is constrained to the real loss that can be demonstrably attributed
to them, the majority of insurance contracts fall within the general category of indemnification. The
insured cannot be compensated for more than the amount insured because it is the maximum amount
for which the insurers would be held liable and is the amount for which the insured has paid premiums.
However, because the indemnity contract is one of indemnity only, the indemnity holder may only be
able to recover the actual amount of his loss and not any additional amounts, regardless of how much
he may have estimated his loss would likely cost or how much in premiums he may have paid based on
that estimate.[83]
The contract of Indemnity under the Indian context is not free from ambiguity. Where there is confusion
between express and implied contract of indemnity, there are also vague perspective upon whether
insurance policy and the contract of indemnity are one and the same thing.
Though section 124 and 125 of the Indian Contract Act, 1872, on a plain reading provides us only with
the possibility of the promisee to claim indemnity from the loss suffered by the actions of human agency
(i.e., the promisor or the third person) but due to the development and the transnational trade and
mercantile activities, the indemnity clause within section 124 and 125 of the Act, 1872 are getting wider
with every dispute of indemnity in the civil law due to the linkage of the insurance policy (except the
life insurance) with that of the contract of indemnity.
Keeping in view to all the grey areas within the two afore-mentioned sections and the precedents laid
down by the court, the author puts forward the analysis that can be used as a tool to resolve the disputes
related to mercantile indemnity and the coinciding yet crystal line of differentiation between the
insurance and indemnity.
Thus, the author comes up with the mode of concentric circle to showcase the linkage yet contrasting
line between insurance and the contract of indemnity. Therefore, the author initiates the step to fill
the gap of the ambiguous statement that insurance and the contract of indemnity goes hand in hand.
One must diligently look upon the construction of the original contract before drafting a conclusion on
whether the valid agreement is a contract of indemnity or a mere insurance scheme or a collision of
both.

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Actual loss
suffered by the
Absolute obligation to pay an insured/upon
entitled amount against a potential proof of actual
loss to be suffered by the insured not loss to be suffered
equivalent to the loss suffered against a collateral
event to that loss
by the insured and
the liability to be
incurred by the
indemnifier and
the amount
equivalent to the
loss

Fig.1
The outermost circle is the insurance circle excluding the (life insurance); the inner circle is the
indemnity circle. (Fig.1)

Under the indemnity clause, the assured/promisee must be reimbursed or saved with the exact amount
of loss that he had undergone or about to undergo.
When the author states that there must be proof of the actual loss to be suffered by the promisee which
is against some collateral events related to the obvious loss that the promisee will suffer, the author
would like to clarify the above-mentioned statement within the following day-to-day example for the
readers’ convenience.
For E.g., Person A makes a car-insurance policy under XYZ Policy Bazaar. The insurance can be claimed
to incur the actual amount of loss that Mr. A will suffer if his car meets with an accident. Suppose Mr.
A’s car meet with an unpredictable accident during one fine day, and his car gets damaged to the
amount of Rs. 5000, the insurance policy bazaar will either pay Mr. A with Rs. 5000 to renovate his car
or the policy bazaar will itself incur the actual damage suffered by Mr. A.

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Under the above-scenario, Mr. A is an indemnity cum insurance holder and the XYZ Policy Bazaar is an
indemnifier cum insurer since, the basic principle of indemnity is reimbursement and to save the
indemnity-holder against the actual loss suffered.
Hence, it can be concluded that if the insurance claim is equivalent to the amount of the loss suffered
with the actual loss or the proof of actual loss to be suffered by the assured upon proof of the collateral
event to that loss, then at that point insurance and indemnity are one and the same thing.
As a consequence, a drafter must be absolutely clear with what indemnity signifies under the general
notion and how does the original insurance policy is drafted to examine whether the insurance policy
coincide with the contract of indemnity or it indicates the crystal differentiation based the amount of
loss that the indemnity-holder or the policy-holder will be entitled to.
Thus, not all insurance policy is contract of indemnity but a part of the insurance policy is an indemnity
contract.

5. Subrogation and Indemnity in India

Subrogation, which arose as an equitable theory, allows for the modification of rights in a variety of
situations to avoid unjust enrichment. When an insurer indemnifies an insured who is entitled to
reimbursement for the loss from another source, the insurer may be subrogated to the insured's rights
in specific circumstances.[84] The doctrine of subrogation does not apply to life and personal accident
insurance contracts.[85]
There are two kinds of subrogation, simple subrogation and reviving subrogation.[86]
The assured has the right to recover the real damage from the indemnifier, as well as continuing rights
against the third party that is principally accountable for the assured's loss, in simple subrogation.[87]
However, in reviving subrogation, the indemnifier in the preceding example steps into the shoes of the
assured and can sue the third party for damages for its primary liability once the indemnifier originally
indemnifies the assured according to the original contract's terms.[88]
Suretyship is an example of revived subrogation, whereas insurance is an example of simple subrogation.
When the insurance contract expressly stipulates that subrogation applies, the surety assumes
responsibility for all damages incurred by the assured as a result of a third party's negligence. As a result,
the insurance company identifies itself as the surety against the assured and the subrogated against
third-party damages when it draughts the original contract with the subrogation provision.[89]
Without subrogation, there would be a significant moral hazard, which might have a significant impact
on insurance premiums, as people would be driven to collude to commit acts that appear to be torts.[90]

Subrogation

Simple Subrogation Reviving Subrogation

Compensation Restitution

Whether subrogation (reviving/simple subrogation) falls under the ambit of Indemnity in India?
When an insurer indemnifies an insured who is entitled to reimbursement for the loss from another
source, the insurer may be subrogated to the insured's rights in specific circumstances to claim the
damages as per the court’s discretion against the wrong done by the third party.[91] If compensation
and not the actual amount that the insurer paid to the insured is granted by the discretion of the court,
in no case does the compensation system fall within the umbrella of indemnification.
If, on the other hand, the subrogate holder's (i.e., the insurer in the shoes of the insured) right to
recovery against a third party are truly restitutionary, the insurer may be able to recover the costs it
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expended in modifying the assured's loss.[92] Subrogation (restitutionary subrogation within the scope
of reviving subrogation) falls under the umbrella of indemnity in this scenario.
If the measure of recovery is incompatible with restitutionary subrogation, in which the insurer, in the
shoes of the assured, can only claim damages rather than the actual loss incurred by the assured and
indemnified by the insurer, but falls outside the scope of indemnity, then subrogation cannot be
considered a form of restitution.[93]
In simple subrogation, the assured might seek damages from the wrongdoer who is not within the
indemnification circle. Simple subrogation, on the other hand, is not a kind of implied indemnity even if
it is equal to the amount of damage experienced by the assured.[94] Subrogation is a norm of equity,
and equity will never allow the injured to be compensated twice by the insurance and the person
responsible for the loss.[95] It is completely contrary to the spirit of indemnification contracts for a
person to recover his loss more than once; it follows that if he has already recovered from a third party,
there can be no culpability under the indemnity contract.[96]
The principle of indemnity states that no one should be entitled to more than what he is owed in a legal
procedure, and that recoveries are for losses. Furthermore, no one should be entitled to more than the
entire indemnity for his insured losses under an insurance policy.
As a result, only restitutionary subrogation under reviving subrogation falls under the contract of
indemnification, express or implied, as it falls under the ambit of recovery of the actual loss sustained.
Analysis on contrast and coincidence between subrogation-insurance in indemnity in India
There is often a dilemma whether subrogation is equivalent to the Contract of indemnity since, the
principle of subrogation is to compensate the insurer after the insurer has paid the loss suffered by the
insured due to the wrongful act of the third-party.
The third-party here will be explained via a day-to-day example.
For E.g., Mr. A has a brand-new Ertiga. After buying the car, Mr. A holds an insurance claim under the
XYZ Policy Bazaar if his car meets with any unfortunate accident. On one unfortunate day, the car was
hit from behind due to the negligent and rash driving of Mr. B. upon proof of the accident, the
insurance-holder, i.e., Mr. A is entitled either to the full amount of loss that he is obvious to incur to
renovate the car (indemnity cum insurance) or a minimal amount (based on the policy).
Now, in the absence of subrogation, Mr. A has a right to sue Mr. B for his rash and negligent driving.
But, once the XYZ Policy Bazaar signs and agreement of subrogation with Mr. A, the policy bazaar comes
in the shoe of Mr. A. It can either claim damages from Mr. B where under the court’s discretion the
policy bazaar will get a mere compensation OR it can be entitled to the restitutionary amount, i.e.,
the equivalent amount that XYZ Policy Bazaar granted to Mr. A.
Here, the twist comes where, insurance holder despite giving the mere entitled amount to Mr. A which
is not equivalent to the actual loss suffered by him (absence of contract of indemnity between Mr. A
and XYZ Policy Bazaar) but if the Policy Bazaar gets the exact mere entitlement that it gave to Mr. A
upon his loss as per their agreement from Mr. B, there comes into the picture, the implied indemnity
contract.
Therefore, a mere entitled amount by the insurer to the insured despite falling outside the circle of
indemnity, if under subrogation, the insurer restitutes that mere entitled amount from the third party,
there exists the Contract of indemnity.

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Absolute Indemnity
obligation to
pay the entitled Reviving
amount against
Restitutionary
a potential loss
subrogation
to be suffered
by the insured

Fig. 2
The outermost circle is the insurance policy (excluding life insurance). The inner circle within it is
the indemnity circle. The common circle within the indemnity and the insurance circle is the reviving
restitutionary subrogation circle.

It implies that, the reviving restitutionary subrogation clause within the indemnity-insurance policy as
well as mere insurance policy falls within the ambit of contract of indemnity as the very purpose of the
contract of indemnity is restitution or reimbursement against the amount of loss suffered by the
promisee.

6. Conclusion
The entire research paper took up the issue of identifying and picking up the ongoing dilemma cum grey
areas of sections 124 and 125 of the Indian Contract Act, 1872. It must be noted that, the Contract Act
of 1872 must undergo a massive amendment to meet the contemporary transnational trade disputes.
However, narrowing down the generalized statement, the author derives the readers’ attention towards
the contract of indemnity. It is obvious that a draft of 1872 is incapable of meeting the trade disputes
of the contemporary era. Moreover, the illustration of section 124 and section 125 of the Act, 1872 are
highly incompatible to be taken into account where trade disputes are not only matters of a mere sum
of Rs. 100 but the inclusion of digital currency and the man-made inconvenience which are not directly
but indirectly a loss accompanied by human agency.
Therefore, the author suggests the following recommendations that can be followed until the draft of
section 124 and section 125 of the Act, 1872 undergoes an utmost required amendment in the hands of
legislature.

Recommendation to fill in the grey areas of Contract of Indemnity in India

1) Firstly, it is high time for the legislature to amend section 124 of the Indian Contract Act, 1872
with an inclusion of the phrase a contract ‘express’ or ‘implied’ by which one party promises

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to save the other from the loss caused by the human agency. (i.e., the promisor himself or any
other person)
2) Secondly, there have been a never-ending dilemma upon whether the indemnification must be
made before the loss suffered or after the loss suffered by the promisee. Due to absence of any
specific explanation whether indemnification is the exact reimbursement after the loss suffered
by the promisee or a concept of equity within the civil law where indemnification can be claimed
before the loss suffered by the promisee.
As per the author’s analysis, the upcoming contemporary civil law disputes on indemnification must be
solved with the concentric circle mode keeping the draft of the parent contract within its focal point.
3) Thirdly, the Indian Contract of indemnification is always under-looked as a narrow scope of
indemnity for its plain explanation in only two sections describing the losses suffered due to the
actions of the human agency. However, the contemporary mercantile fraternity has started
taking up the issues of vis major due to the extraordinary transnational trade practices being
carried out within the entire globe. Therefore, it is high time for the legislature to expand the
definition of any other person within Section 124 of the Act, 1872 along with a brief explanation
on the inclusion of the vis major activities.
4) Fourthly, the ambiguity between insurance and indemnity must be solved under the concentric
circle mode (fig.1), since, every layman is under false obviousness that insurance and indemnity
are one and the same thing. The same, follows up under the contract of subrogation which is
already explained in the above-depicted concentric circle (fig.2).
Therefore, the author came up with the very notion that, contract of indemnity under Section 124 and
125 of the Act, 1872 is generic and enlarged though narrow in illustration. Unless the legislature amends
the very sections or incorporates the changes introduced in the 13 th Law Commission report[97, the
conflict under sections 124 and 125 of the Act 1872 must be read in the concentric circle mode precisely
emphasizing the original draft of the contract of indemnity and the insurance. Hence, contract of
indemnity is a matter of construction of the original draft of the parent contract.

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1992)
[88] Simpson v. Thomson, [1877] 3 App. Cas. 279
[89] Robert W. Emerson, Insurance Claims Fraud Problems and Remedies, 46 U. Miami L. REV. 907. (1992)
[90] Burnand v. Rodicanachi, (1882) 7 AC 333
[91] Vasudeva Mudaliar v. Caledonian Insurance Co., AIR 1965 Mad 159
[92] Supra note 62
[93] Supra (1882) 7 AC 333
[94] Trustees of the port of Madras v. Home Insurance Co. Ltd., LNIND 1967 Mad 173
[95] Marine Insurance (British shipping laws Vol. 10, Pg. 1193)
[96] Supra note 65
[97] Law Commission Report

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